Investing in My SEP-IRA Account

By Sun

Before the April 15th tax deadline, I opened and funded a SEP-IRA account with Fidelity. The reason I chose Fidelity is that it is also the custodian of my 401(k) and my daughter’s 529 account (I am using the Fidelity UNIQUE plan which is tied to the Fidelity 529 Rewards Card). In addition, I also have regular brokerage account with Fidelity, in which I buy Alpine Dynamic Dividend (ADVDX) every month without paying a commission. Having multiple accounts with one broker makes things a little easier.

Anyway, opening an account and sending the check are the easy job. Next, which is the hard part, is selecting what to invest. Despite the recent performance of bonds, I am not really interested in buying bonds in my account at this moment. Instead, I want to take advantage of the slump of the stock market. So I decided to go with all equity, those that have been hit very hard such as large-cap and international stocks. I also like small-cap stocks as I always do, but I will leave that part till next time. As for my investment choices, I can buy individual stocks, ETFs, or mutual funds, from Fidelity or other fund companies. However, the first two options involve commissions and they are not cheap. For example, Fidelity charges $19,95 for trading stocks. That’s a little bit too much even though I expect to make only a few trades if I go with stocks/ETFs. Doesn’t seem to be a good strategy. So I decided to take the traditional approach of buying mutual funds.

After going through funds offered by Fidelity (there are hundreds of funds), I eventually picked two of them as the first set of investment. In the large-cap area, my choice is Fidelity Contrafund (FCNTX), which was reopened to new investors at the end of 2008 after being closed for more than two years since 2006. Like many other large-cap funds, FCNTX also suffered a massive loss last year, but the result is inline with the return of the S&P 500 (actually, 0.20% better). The fund has an expense ratio (ER) of 0.94%, not terribly high for an actively managed fund. Morningstar Analyst Research (a feature of Marningsar Premium Membership) has the following comment regarding the fund shortly after Fidelity announced the fund’s reopening:

Given the sharp losses the fund has suffered this year, investors might be leery to jump in. We think that’s a mistake. Yes, its 39% loss isn’t pretty. And yes, manager Will Danoff has made some mistakes this year, especially in energy, where he thought oil and gas prices would remain high and earnings would continue to improve. But Danoff rightly shifted his portfolio into health-care and consumer staples names like Genentech DNA (which is actually up nicely for the year) and Procter & Gamble PG (which is down but much less than the overall market). He also avoided the big casualties of the credit crisis, such as American International Group AIG, and many of his picks in financials, like Wells Fargo WFC, have worked out well. So, despite the fund’s steep slide, it’s still beaten 75% of its large-growth rivals.

The other fund I chose is Fidelity International Discovery (FIGRX), a foreign large-cap blend fund. My first choice is actually Fidelity Spartan International Index (FSIIX), which tries to match the performance of the MCSI EAFE Index. With an ER of only 0.10%, even Vanguard funds can’t beat FSIIX in terms of cost. Unfortunately, the fund’s initial investment requirement of $10,000 is a little bit hard to reach for me. So I have to settle with FIGRX, which has a much higher ER of 1.05%. Despite the higher cost, the fund does have similar weights on countries and sectors as the MCSI EAFE index and focus a little more on small-cap stocks and emerging markets. The fund’s 2008 return of -44.3% is slightly worse than that of the MCSI EAFE index, but I hope when the current economic slowdown is over, the fund will provide some good returns.

As for asset allocation, I put 70% in FCNTX and 30% in FIGRX in my first investment. Since I have no plan to hold bonds in this account (at least not now), I’d like to see an allocation of 50% large-cap, 20% small-cap, and 30% international after I purchase a small-cap oriented fund later.

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